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The Magic Formula for Stock Picking

By Jeff Clark
Tuesday, June 5, 2007

There are still lots of good buys in the stock market.
 
Yes, the stock market is overextended. Yes, it's vulnerable to a sharp correction that could happen at any time. Yes, there's lots of risk. And yes, I'm still leaning bearish...
 
But if you look hard enough, you can still find plenty of good, low-risk opportunities for new money. The key phrase there, of course, is "low-risk."
 
You can't eliminate risk completely. But you can knock it down to manageable levels if you stick to stocks with the following characteristics...
 
  • Lots of cash: Nothing says "value" like a big pile of cash. Stocks that have 30%, 40%, even 50% of their market capitalization in cash on their balance sheets have a built-in hedge against a stock market decline.
 
  • No debt: It's impossible for a company to go bankrupt if it doesn't owe any money.
 
  • Stock buyback program: The willingness of a company to step in and buy its own shares helps support the stock price in a weak market.
 
  • Temporary business setback: This is what gives us our opportunity. Wall Street doesn't tolerate disappointment and it crushes stocks that fail to meet expectations. But if the setback is temporary, then investors can see enormous gains when the company gets back on track.
It's as close to a magic formula as you're ever going to find...
 
Cash + No Debt + Stock Buyback + Temporary Setback = Winning Stock Trade
 
For the past few months, we've been applying this formula to new recommendations in The Big Trend Report. And it's working quite well.
 
In March, we bought shares of OmniVision (OVTI) at $11.70. The company had more than 50% of its capitalization sitting in cash. It had no debt. Management increased the stock repurchase program. And shares were depressed because of some short-term adverse business conditions.
 
Last Friday, OVTI closed at $16.30 – a gain of almost 40% from our original purchase price. That's not too bad for three months. And there's more to come.
 
The stock we bought two months ago is up 9%. And last month's recommendation has already gained 4%.
 
Another stock that fit the formula, but ran up before we could jump in, is Albany Molecular (AMRI). Six weeks ago, AMRI was trading at about $10 per share. It had $3.40 per share in cash, no debt to speak of, a modest repurchase program, and a depressed share price.
 
Like OVTI, today, AMRI is 40% higher.
 
Here are a few more debt-free stocks that fit into the formula:
 
Stock
Share Price
Cash Per Share
Authorized Share Buyback
Paragon Tech. (PTG)
$5.85
$4.20
$15 million
NetFlix (NFLX)
$21.57
$5.64
$100 million
Symyx (SMMX)
$10.32
$4.54
undetermined
 
When you're looking to put money into a stock market that's a bit overheated, you need to focus on low-risk ideas. I can't think of a better strategy than to look for companies with lots of cash, no debt, a stock buyback program, and a share price that's been hurt because of a temporary business setback.
 
We have five stocks in the Big Trend portfolio that fit into this formula. And I'm adding another in the next issue. If you'd like to learn which one, you can become a Big Trend Report subscriber here.
 
Best regards and good trading,
 
Jeff Clark




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Market Watch
Symbol Price
Change
52-Wk
S&P 500 1221.53 +1.3% +10.1%
Oil 37.77 +1.5% -2.8%
Gold 135.20 -0.1% +13.4%
Silver 27.93 +0.4% +47.9%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 19.39 -9.2% -8.2%
Gold Stocks 564.53 +1.3% +10.6%
10-Year Yield 3.00 +1.4% -9.6%

World ETFs
Symbol Price
Change
52-Wk
USA 122.56 +1.3% +10.2%
Canada 30.44 +1.3% +13.8%
Russia 21.63 +2.3% +16.7%
India 37.73 +1.9% +20.0%
Israel 16.47 +0.9% +9.7%
Japan 10.58 +1.0% +7.4%
Singapore 13.88 +1.0% +19.2%
Taiwan 14.72 +1.6% +17.8%
S. Korea 56.56 +1.7% +22.8%
S. Africa 70.85 +3.9% +22.9%
China 45.06 +1.4% +0.1%
Lat.America 52.82 +1.4% +6.7%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 136.18 +1.5% +14.8%
Big Pharma 64.13 +0.6% -3.3%
Internet 72.13 +0.7% +22.3%
Semis 16.03 +2.1% +28.9%
Utilities 31.21 +0.3% +1.6%
Defense 18.51 +1.3% +10.1%
Nanotech 9.99 +1.3% +0.0%
Alt. Energy 9.95 +1.4% -4.4%
Water 18.31 +1.1% +12.2%
Insurance 16.07 +1.2% +18.3%
Biotech 20.58 +1.1% +27.1%
Retail 19.65 +0.1% +28.4%
Software 24.59 +0.9% +24.1%
Big Tech 53.73 +1.0% +21.9%
Construction 12.99 +2.1% +13.3%
Media 13.57 +1.1% +25.0%
Consumer Svcs 67.26 +0.8% +23.3%
Financials 54.87 +2.4% +5.2%
Health Care 64.22 +0.7% +1.3%
Industrials 63.25 +1.6% +19.7%
Basic Mat 73.57 +1.6% +21.6%
Real Estate 55.24 +1.4% +23.8%
Transportation 91.17 +1.4% +25.6%
Telecom 22.48 +1.1% +17.1%